Be it
laneway houses, secondary suites, the Empty Home Tax, or the latest Airbnb
restrictions — all have complex legal and tax implications, which are often not
known or fully understood.

In
sharing these observations, I should note I am neither a tax accountant or
lawyer. Rather, I am an architect and real estate consultant who has long
advocated for the legalization of basement suites and laneway or coach houses
for rent and sale.

While I
oppose taxes on vacant dwellings for philosophical and administrative reasons,
I support new regulations on Airbnb and similar programs since they have
negative impacts on available rental housing, condominium living and the hotel
industry.

Many
owners of empty or “under-utilized” dwellings also oppose the Empty Home Tax on
the grounds it is inappropriate and/or unfair, and intend to sign creative, and
in many cases fraudulent leases, to avoid paying the tax.

However,
owners of laneway houses and basement suites could soon be found to be
inadvertently or deliberately evading taxes, due in part to the recent Canada
Revenue Agency (CRA) decision requiring Canadians to report the sale of a
principal residence on their income tax returns, starting in 2017.

This new
rule was meant to reduce tax evasion by closing a loophole exploited
by real estate speculatorswho often bought and sold properties tax-free as
principal residences.

Most
Vancouver residents who rent a laneway house or basement suite know they are
required to report net income from rentals. However, few understand the GST
implications of building these dwellings, or the income tax implications when
the property is sold.

The Real
Estate Board of Greater Vancouver and CRA have prepared documents setting out
these tax obligations. Many accounting firms, including Grant Thornton, have
also prepared useful tax advice.

GST
considerations related to laneway houses vary considerably depending on whether
the house was built for long-term or short-term rentals, or a family member.

Without
going into all the details, if a property owner builds a laneway house to be
rented to others, and is not registered for GST, he or she must self-assess GST
on the fair market value of the laneway house and the land associated with it.
Yes, that’s right. It is not just based on the cost of the laneway house. The
valuation must include the associated land.

Determination
of land value could be difficult, especially since the laneway house cannot
currently be sold. But if the CRA deems it to be say a quarter of the total lot
value, even though the owner may be entitled to Input Tax Credits and certain
tax rebates, the tax consequences could be significant.

These
rules apply because the homeowner is considered the builder of the laneway
house for GST purposes. This is not the case if he or she purchases a property
that already includes a laneway house.
However, if the laneway house is built for a family member, the tax
consequences are quite different; the owner may not be required to self-assess
GST.

But here
is where it gets interesting. If that owner subsequently decides to rent the
property, he or she will not have to self-assess the value of the laneway house
and associated land because the status of the property will have changed to a
“used residential complex.”

Consequently,
first occupancy of a laneway house by a related person provides the best
outcome for the owner in terms of GST liability.

From my
discussions with homeowners who have built laneway houses and contractors, few
appreciate these GST tax implications. More importantly, they are not aware of
what will happen when the property is sold.

The
principal residence rules are very complex, and most property owners should
consult their accountants. But the key point is the laneway house is not
eligible for the same principal residence tax exemptions as the balance of the
property. Any deemed increases in value will be treated as taxable capital
gains.

Somewhat
surprisingly, similar tax consequences could apply to basement suites that have
been ‘structurally altered’ to meet city building codes. But this is another
story for another day.